Ride With the Wind

Roger Conrad, editor of the Utility Forecaster, finds a utility that's moving aggressively into wind and other forms of alternative-energy production.

Carbon regulation was shot down in the US Senate last month. But with both [presidential candidates] John McCain and Barack Obama in support, it's certain to be back in 2009. Meanwhile, the cost of natural gas is skyrocketing, pushing up utility rates across the country at the same time the industry is launching a projected $1.5- trillion, 20-year capital-spending boom.

Those challenges are putting a premium on new technologies for the power industry. To date, the favorite by far has been wind power. Not only is the technology competitive with conventional fuels such as natural gas, but it enjoys federal subsidies. This spring, the US Dept of Energy issued a report projecting wind could provide 20% of US energy needs by 2030, up from less than 1% in 2007.

Achieving even a fraction of that means big money to developers and operators of wind plants. Operators are the more conservative way to play. My favorites are AES (NYSE: AES) and FPL Group (NYSE: FPL), now the largest player in the US. These companies are literally able to locate wind plants anywhere and begin earning big revenue streams.

After rapidly growing from its inception in October 1981, AES nearly imploded in 2002 as its multinational empire grew unwieldy and challenged a mountain of debt.

But with aggressive rebuilding under chief executive officer Paul Hanrahan, AES is surging again, this time as a leading generator of renewable energy with a major presence in developing Asia.

Wind, solar, and other nonhydro renewables are currently only about 2% of the company's roughly 43-gigawatt portfolio. But with 29 gigawatts in the development pipeline, that share will rise dramatically. The company is also a leader in carbon abatement and is hammering out a position in liquefied natural gas as well. Coupled with portfolio streamlining-such as the successful sale of various coal and power assets in Kazakhstan-and solid plant and utility performance, growth has revived. The company now expects earnings per share to rise 14% to 17% annually well into the next decade.

AES common shares have risen more than 19% a year since mid-2003. Going forward, I expect future stock gains to match earnings growth. AES common shares are cheap and a strong buy up to $24. (They traded below $17 Tuesday-Editor.) Income Portfolio pick AES Preferred C is a high-yielding alternative that will eventually gain along with the common.